Despite an overwhelming consensus among the scientific community that human activity is causing climate change, most of the world's largest investment managers do not factor climate-related trends into their short- and long-term investment decision making, a new study finds.
According to a report by Ceres, a coalition of investors, environmental organizations and public interest groups, this short-sightedness is creating trillions of dollars worth of hidden risks in mutual fund and other investment portfolios, such as high energy costs, pollution, water shortages and insurance costs resulting from natural disasters. Sectors like utilities, energy, industrials, manufacturing and the automobile industry have significant exposure to climate risks, the report said.
Attempts to jump-start this issue have repeatedly frustrated leaders from Kyoto to Copenhagen, but the escalating climate crisis demands their persistence.
Ceres has repeatedly pressed the Securities and Exchange Commission to require companies to disclose material climate risks to investors, and the group says the SEC is seriously considering issuing interpretive guidance on the subject, though the agency has yet to formally commit to such a move.
In the meantime, investors are increasingly demanding this information from their asset managers, said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk.
"Despite the growing recognition of the far-reaching impacts climate change will have on the global economy, only a handful of asset managers are integrating climate risks and opportunities throughout their investment practices," Lubber said. "These findings make clear that the investment community is overly focused on short-term performance and ignoring longer-term business trends such as climate-related risks and opportunities."
She said the report, titled "Investors Analyze Climate Risks and Opportunities: A Survey of Asset Manager Practices," found that nearly 49% of survey respondents did not analyze climate risks because their investor clients did not ask them to.
"Asset owners, such as pension funds and other institutional investors, are either not asking their asset managers to include climate risk and opportunity analysis, or are only beginning to raise the subject," the study found.
The report recommends that institutional investors push their asset managers to pay more attention to climate-related issues. This can be done through requests for proposals, through manager reviews or through other hiring procedures.
The California State Teachers' Retirement System (CalSTRS), the nation's second largest public pension fund with more than $130 billion of assets under management, recently announced it will engage its active equity managers on their climate risk analysis, specifically the need for managers to have climate-change expertise.
"As a long-term investor, CalSTRS wants to invest in well-managed companies that can address the physical risks of climate change and adapt to the changing regulatory and market realities of a carbon-constrained economy," said Jack Ehnes, chief executive officer of CalSTRS. "Our asset managers need to ask the right questions and critically evaluate how companies are positioned so that we're sure that our investments will produce outstanding risk-adjusted returns for our members."
Ehnes said the cultural consensus in California supports forward-thinking environmental issues, and CalSTRS's large size makes it very influential.
"This is about significant business issues that affect our portfolios," he said. "It is incumbent upon everybody to act quickly. I think in this market, [asset managers] will be responsive."
While California has taken the lead on this issue, the effects of climate change are global.
"This issue will have far-reaching consequences for the global economy," Lubber said. "Companies, investors and the rest of the capital markets need to respond to business risks and recognize the broad financial impacts of climate change."
The Ceres report recommends that asset managers conduct climate risk assessment as part of their due diligence for all their investments, include a statement about climate risks and opportunities in investment policy statements, incorporate climate risk into the evaluation of corporate governance, adopt a proxy voting policy on environmental and social governance issues, and engage the SEC and other policymakers to support full disclosure of climate change and other sustainability risks.
"The SEC is in the final stages of providing guidance on the filing of 10-K forms, in regards to explaining climate impact," Lubber said. "A number of companies are already disclosing this information, but once the SEC issues guidance, it will be mandatory. The number of companies that will disclose climate risk will go up substantially. Climate risk as a financial matter is a material risk, not an off-balance-sheet risk."
The Ceres report found that although asset manager climate risk analysis practices vary widely, many managers are quickly changing their practices to incorporate these risks. Alexis Krajeski, associate director of governance and sustainable investment at F&C Management Ltd., a UK-based asset manager, said F&C has been incorporating climate change into their investment decision-making process. "Our clients are asking us to do this," she said.
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